Microfinance: A 5 point call for change

By: Bindu Ananth and Nachiket Mor

We have maintained a consistent position that despite all the imperfections of the MFI industry, the AP crisis was brought on primarily by the Ordinance that restricted the ability of MFIs to collect on the loans they had made and the misplaced perception of key stakeholders that this is an unregulated industry, despite 80% of the loans being made by RBI regulated NBFCs. It was (and still is) imperative to remain completely focussed on solving the immediate issues of liquidity and prevention of contagion to other states so that the collateral damage to hundreds of genuine initiatives is minimised and that the lifeline of access for customers is not permanently damaged.Bindu Ananth on microfinance India

However, now that the RBI has made a call to restore liquidity, we hope that the short-term issues will be managed and it is time to turn our attention to some of the deeper messages from the crisis. We are proposing a 5 point action plan for MFIs to ensure that there is a better acknowledgement of the value of their contributions to the life of a low-income household the next time around:

1. MFIs provide a very useful service to clients by allowing them to manage their cash intra-year between periods of excess income and deficit income. This kind of cash management ability makes a big difference to a low-income household by reducing their need to sell household assets or take on expensive informal loans. In addition to this service however, MFIs must increasingly work hard to build a relationship with the communities that they serve. They must track the financial well-being of every household that they serve. They must hold themselves and their loan officers accountable to this metric. This is imperative if the community has to stand by their side in future crises.

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